As the crack team at our affiliated website,
HardAssetsInvestor.com, has been chronicling, agricultural
commodities prices are soaring. In fact, corn prices were
"limit-up" earlier this week.
The culprit is a heat wave the likes of which we haven't seen
since 1982, and the resulting expectation of production declines,
but the returns to ETF investors have been lukewarm at best. What
gives?
ETF investors don't get spot prices.
Stop me if you have heard this before, but I will say it
again:ETF investors in commodities don't get access to the spot
market. In fact, they don't even get access to the front-month
futures contract on the commodities.
I realize this comes as little surprise to loyal readers of our
blogs, but the contrast between the performance of spot corn,
soybean and wheat prices and their ETF counterparts has been
striking.
What's perhaps even more interesting is that ETF investors in
single-commodity agricultural ETFs don't even get access to the
front-month futures contracts on those commodities.
Take a look at the chart below which shows the performance of
the front-month contract of the three popular agricultural
commodities mentioned above-corn, wheat and soybeans.
The Teucrium Corn Fund (NYSEArca:CORN) has been the best
performer of the lot, but even its 33 percent rise since June 1 is
10 percentage points worse than the performance of the active
contract on the commodity.
The Teucrium Wheat Fund (NYSEArca:WEAT) has lagged its
front-month contract by 12 percentage points, while the Teucrium
Soybean Fund (NYSEArca:SOYB) has lagged the active contract on
soybeans by 6 percentage points.
The broad agricultural commodity ETN, the PowerShares DB
Agriculture Fund (NYSEArca:DBA) is only up 15 percent over that
period despite the fact that nearly 50 percent of its index covers
corn, wheat and soybeans.
The reason for that has to do with the awful performance of lean
hogs and cattle prices, but the reason for the lagging performance
of CORN, SOYB and WEAT has to do with the nuances of Teucrium's
index methodology.
Since we know that investors can't and don't invest in the spot
price of the commodity, the closest they can get is in the
front-month futures contract.
These contracts are the best available measure of spot prices in
these commodities, but CORN, WEAT and SOYB don't hold these
contracts. Instead, they own three different contracts farther out
on the futures curve.
In a way they make a trade-off.
Instead of giving investors access to the short-term price
movements of front-month contracts, they position you for the
longer term.
In periods of extreme contango, this will likely benefit
investors, but in periods of backwardation that are accompanied by
big short-term price increases, like we are currently seeing in
corn and soybean prices, it will cost investors.
So while investors may have timed the market perfectly, buying
CORN or SOYB back in June, that does not mean they get to
participate in the sharp run-up in the spot market for those
commodities. That dichotomy is another stark reminder that
investors must understand exactly what they are buying.
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